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Why Startups Should Use Sig...

Most startups don’t like signing bonuses. The idea of paying people for contributions they haven’t yet made doesn’t fit the startup culture where individual and collective effort holds the promise of outsized future rewards.

But judicious use of this tool can help smaller companies close hires who might otherwise join a larger, deeper-pocketed rival--with the added bonuses of actually saving money over the long term and keeping the existing corporate salary structure in place.

Imagine the case of an engineer with a decade of experience who wants to work at a startup. If she has personal commitments to support, say a mortgage or healthcare expenses, a few thousand dollars might mean the difference between accepting the job at your company or a less-rewarding but higher-paying job somewhere else. Believing in a company isn’t always enough to overlook the practical sides of life.

The most common solutions are: 1) hold firm on your offer, because you believe that a person should really want to work at your company and accepting a lower offer is proof of the candidate's commitment; or 2) attempt to close the gap more directly by countering with a higher salary or more equity. Choose option one and you might lose the candidate. Option two dilutes your company or breaks your salary structure and still rarely closes the gap fully.

This is where signing bonuses can make a big difference. Consider the following example:

Your offer with a signing bonus:

Year 1: $125,000 + $30,000 signing bonus = $155,000

Year 2: $125,000 + $6,250 (5% raise) = $131,250

Two-year total: $286,250

Your competitor’s offer:

Year 1: $150,000

Year 2: $150,000 + $7,500 (5% raise) = $157,500

Two-year total: $307,500

The engineer makes more in the first year by taking your job. But in year two, you potentially save more than $20,000 compared with simply matching the other company’s offer. It also puts you in a position to have a year’s worth of on-the-job performance data to justify any year-two increase (cash or equity). So by paying a bit more now, you increase the chances of landing the person and you remain in control of your team’s salary structure for the long term. Ensuring the people in your organization are receiving similar pay for similar contributions also makes future leveling adjustments much less stressful for both you and your people.

And perhaps most importantly, consider it from the engineer’s point of view for a moment: Not only does it solve the engineer’s financial problems--at least for now--but it’s a giant offer love bomb. It says, “They believe in me and want me there, and have done everything they can to make it so.” When someone is looking for a reason to join your company that kind of message and commitment can mean a lot.

Grove is where founders share practical advice. We'll be posting more insights in the months ahead.